To the chagrin of European Union negotiators, the Greek government of Prime Minister George Papandreou decided to ask the Greek public to give its yea or nay regarding the terms of the European Union’s latest bailout agreement.

Three days later, under intense political pressure, he canceled the referendum.

That’s bad news for Europe, for Greece and for peace.

Papandreou gambled on democracy, and he appears to have lost. The democratic clarity the vote would have provided would have served as a tool for reform, potentially for Greece, but ultimately for the entire euro-zone. Either the euro-zone has rigorous economic standards or it doesn’t. Member nations are responsible for meeting those standards.

In Athens, protestors have jammed the streets, rejecting what they called foreign interference in internal affairs. Greek media reported protestors slurred Germans by referring to them as Nazis. Little wonder Western European leaders thought the prospect of Greek voters ratifying the loan deal was unlikely.

The protestors, however, also damned the Papandreou government’s austerity measures. Papandreou is considering firing 30,000 state workers in order to meet 2012 budget goals and begin reducing the nation’s debt burden.

Proposed reform of Greece’s public pension system has incited even broader resistance. Not all pensioners sit in wheelchairs. Last month, StrategyPage.com noted that several hundred former Greek military officers publicly staged a protest against potential cutbacks in military pensions. A Greek news report added that some of the military retirees demanded an end to the ruling Socialist Party government. Merely venting frustration? Probably … maybe. No one mentioned military coup d'etat, but then no one had to. Memories of The Colonels Regime dictatorship (1967-1974) have not faded.

When making her case for the new bailout, German Chancellor Angel Merkel told Germany’s parliament “Nobody should take for granted another 50 years of peace and prosperity in Europe … that’s why I say: If the euro fails, Europe fails.” She explicitly raised the prospect of violence.

Ending intra-European wars was the big idea spurring the creation of the European Economic Community, the EU’s predecessor. Thanks to NATO and the EEC-EU, France and Germany have enjoyed six decades of peace. That’s good. World Wars I and II physically and economically devastated Europe; a Greek default pales in comparison.

An economically entwined peace has settled on the Franco-German frontier. France and Germany have prospered. Why? Despite Merkel’s statement, they have not prospered because of the euro; they did well when they used francs and marks. The French and Germans work. Every nation confronts internal corruption, but by and large French and German financial data are trustworthy. Honest trade has built strong political ties.

Greek governments, on the other hand, have lied about debt, violated EU fiscal agreements and borrowed money they cannot repay. The Greek people, who voted for the governments, enjoyed the benefits of the borrowed cash. Now French and German taxpayers say no more freeloading.

The extended Franco-German peace tells us a European “common market,” the old EEC concept, makes sense. The euro-zone’s common currency union? Letting the dishonest borrowers fleece honest lenders then avoid consequence seeds conflict.

In or out of the euro-zone, Greece faces an extended and painful period of political and economic change. The bills are due.

In order to make the changes Greece must make to revive then fully modernize its economy, Papandreou needed a definitive and very public moral and psychological commitment by the Greek people.

A “YES” vote in the referendum would have given him the popular imprimatur to make the necessary structural reforms, confront embedded special interest groups and sideline the violent, policies he indicates he wanted to pursue.

But it appears lenders and domestic opponents weren’t willing to take that chance.

We may see Prime Minister Merkel’s violence sooner than later.

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